Though, some knew better, says the Motley Fool back in 1997:
fool.com
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The Real Estate Update
By Michael Dowd (TMF Yorick)
June 26, 1997
The Best Little Poor-House in Texas
(Corporate Kleptomania, or Some Habits Are Hard To Break)
By Jerome E. Scott (MF Foitdog)
With Michael Dowd (TMF Yorick) and William G. Campbell (WGCAMP)
There?s a courthouse about 20 miles south of San Francisco in Redwood City, California. This Friday platoons of highly paid lawyers will descend on it to appear before a 70-odd-year-old California state court judge with a handsome handlebar mustache. What the Honorable Thomas M. Jenkins ultimately decides can dramatically affect the investors in AMERICAN REALTY TRUST (NYSE: ARB) (N) (S) (N) (S), which has recently been a very hot stock indeed. It can also affect the investors in three other REITs, but the suit is actually about an American Exchange traded limited partnership, NATIONAL REALTY (AMEX: NLP) (N) (S) (N) (S).
American Realty rocketed from $6.50 on January 1, 1997, to $16.75 by the close of business the last day in March. That 157% increase in 90 days pretty much qualifies the stock for the Real Estate Investment Trust Hall of Fame but it did not appear on our recommended list or that of any of the REITanalysts we know. It has settled a bit from its high of $22 1/4 in April, but at Friday?s close of $11.875, it was still up 83% year to date.
American Realty has clearly taken a spectacular journey but, as some exploration through its 10Ks, 10Qs, and 13Ds will show, that one real estate investment trust is only a piece of the story. As recently as January 1, 1992, American Realty's entire public market capitalization had been a tiny $16 million. Today the formerly tiny company is at the center of a tangled mass of real estate assets its sponsors value at over $2.2 billion. To give you an idea how big that is, you could roll all those assets into a ball and it would become the sixth largest REIT in America.
Unfortunately, when the litigation over American Realty's sister partner National Realty ends in Judge Jenkins? court, the conclusion may well be dismal for the original investors whose hundreds of millions in hard-earned savings made all these assets possible in the first place. Most troubling, it looks as if the story may involve a court-blessed transfer of well over $200 million in value from the helpless hands National Realty's public Limited Partners to the pockets of the General Partners and their affiliates. All this, despite the fact that all the parties had previously signed off on a 115 page settlement known to the Judge's court as the "Moorman Agreement."
The trail leading up through the arches over the Redwood courthouse steps started in the late 1960s in Gaffney, South Carolina. By 1973, at age 36, Gene Phillips filed a $30 million bankruptcy -- the largest real estate Chapter 11 in recorded South Carolina history. By 1980, Phillips had recovered, taken over the company of a former creditor, and met a talented and resourceful deal-lawyer/wheeler-dealer named William Friedman. The two found a weakness in the financial structure of an Atlanta-based REIT. Manipulating a forgotten pool of outstanding warrants, they took control of a former affiliate of Citizens & Southern Bank, now known as Southmark. As time went on Phillips?s companies bought a company Lear Jet which was later replaced with a DC-9, and generally they flew about as high over Texas as a financier can.
The next collapse was even more spectacular. Southmark bought San Jacinto Savings & Loan, which the regulators finally took over. Drexel Burnham ponied up with $915 million in two tranches of last-ditch financing. With that money, Phillips?s Southmark Corporation made investments that reportedly scared even Michael Milken. Finally, in 1987 Southmark wrote off over $1 billion in one month and the centerpiece to a $9 billion pile of assets headed into another bankruptcy court.
Before that collapse, Southmark had taken over control of a number of partnerships originally syndicated by Robert McNeill, and in 1987 the principals of the wounded Southmark succeeded in rolling up four of those partnerships. They ultimately contributed most of the assets of the newly formed, AMEX-traded National Realty.
The tale then leads to an eight-year court battle in Judge Jenkin?s court with allegations of huge fees and conflicts of interest being hurled by investors? counsel, and rejected by those representing Phillips and his associated entities. The story involves three other publicly traded REITs controlled by Phillips? associates, as well. The other REITs are CONTINENTAL MTG. & EQUITY TRUST (Nasdaq: CMETS) (N) (S) (N) (S), TRANSCONTINENTAL REALTY INVESTORS (NYSE: TCI) (N) (S) (N) (S), and INCOME OPPORTUNITY TRUST (AMEX: IOT) (N) (S) (N) (S). All these stocks have elements of common ownership and control with other Phillips entities. Interestingly, all have also been pretty hot performers in the first quarter of 1997, though none tied American Realty.
NATIONAL REALTY LP UNITS ($100 MM in Market Cap) + 33%
CONTINENTAL MTG. & EQUITY TRUST (CMETS) -($66 MM) + 30%
TRANSCONTINENTAL REALTY INVESTORS (TCI) -($49 MM) + 14%
INCOME OPPORTUNITY (IOT) - ($22 MM ) + 36%
AMERICAN REALTY TRUST (ARB) - ($196 MM) + $157%
As you will see, we couldn?t honestly tell you if the shares of National Realty will be $6 or $60 or somewhere in between by December of this year. Too much depends on the judge, and perhaps on other potential litigation or even other government intervention. As we will discuss here, the stocks are intimately interrelated, so if anything major does happen to National Realty the waves will certainly rock the other boats as well. As Bette Davis said, "Hold on to your hats, it?s going to be a bumpy ride."
The story came to our attention through two sources at about the same time. First, we monitor stock performance of all REITs and pay particular attention to the small caps where there is little other following. Supply and demand in the small-cap sector of our universe (60 out of 181 <= $200 million), is turf many institutional investors tend to ignore, and it?s one where we snoop around quite a bit.
Then the editor of the Motley Fool's "Daily Double" contacted our TMF Yorick (who hosts the Fool Real Estate board) in mid-February. He inquired if we had any knowledge of why the stock was moving up so briskly. American Realty had more than doubled year to date. By contrast, the average REIT was up only 2.44%. We called a few sources and provided an answer, which, though true enough, turned out to be only the tip of the iceberg.
We were glad to be of help to The Fool, but frankly when we read our answers in print we were not satisfied. Could some rumors of shopping center development have this much effect on the stock? After all, in one year the market value of each of the company?s 13 million shares had shot up some $19. We don?t know how your calculator works, but ours says that?s about a quarter of a billion dollar shift in market cap.
Evidently the New York Stock Exchange wondered as well. On March 25, American Realty Trust closed at $22, up $2 7/8, or 15%, having reached a 52-week high of $20 the day before. That day the NYSE announced it had asked about the unusual activity but the company said it is against its policy to comment on such changes. Not altogether surprisingly the NYSE halted trading in the company?s stock.
That response did not assuage much curiosity around our office. None of my partners nor I have any holdings at all in American Realty, but we couldn?t resist poking around a little more. What follows is the fruit of that research. We have to tell you, though, that so far we still have more questions than answers. On the other hand, a couple of the questions are real doozies.
We went back through recent news items on American Realty. It didn?t add much to what we?d said in the "Daily Double." In fact we turned up nothing that could justify the price move -- revenue growth was nominal, earnings for the past five years were likewise, and the modest dividend had only recently been reinstated. None of that could come close to explaining a couple of hundred million dollar shift in market cap. So we pressed on to the 10Ks. Here the reading became more interesting.
The 10ks reminded us that American Realty is deeply involved with Gene E. Phillips, the principal creator of the old "Southmark." One of Southmark's primary businesses was real estate syndication. From 1981 through 1987, Southmark raised over $500 million in investments from limited partners in several hundred limited partnerships. When it failed in 1989 it was one of the largest real estate bankruptcies in history, nearly taking with it the San Jacinto Savings and Loan and an insurance company. Both had been subsidiaries.
A good portion of my years on Wall Street was spent with Drexel Burnham, the firm that financed most of Southmark?s transactions, though I had never worked on Southmark matters. I became more interested. I had heard about the company through the years, though. Barry Vinocur has written it up quite critically in BARRONS. Ben Stein wrote a pretty tough article on some of their debt in the same journal a few years back. To quote Tom Junod from a fascinating, soap opera like article in SouthPoint magazine:
" At its peak, Southmark encompassed hundreds of real estate partnerships and subsidiaries, operating on the principle that multiplicity represents opportunity. Many of the subsidiaries dealt with each other. Many were apparently acquired or created for the purpose of dealing with each other, and many of the deals remain inexplicable. They did, however, create movement, the illusion of value, and Southmark as a result became a money machine, a cyclotron. It swept up investors? dollars on a current of transactions, broke them down, and reconstituted them as unstable elements. The lights blinked. The machine threw off heat and smoke. And the money somehow, disappeared. Some claim Gene Phillips embraced complexity because it masked malfeasance, but it was not that simple?."
So I wondered if Mr. Phillips could generate as much financial activity and controversy in the 90s as he had in the two previous decades, and I would not have been surprised to find a very complex structure with some very creative leverage lay behind what was going on at American Realty.
Well, we discovered that American Realty is, in fact, part of a typically Philippine intertwined nest of related entities. (Graphic) Take a look at the following (very simplified) chart of the cross-ownership between these five public companies. But do look quickly, because the SEC filings indicate that which Phillips entity owns how much of any other Phillips entity is subject to very drastic change from one day to the next.
When you start looking into each of these entities, you soon discover that what we are looking at is not one REIT, with a market cap on 1/1/92 of $16 mm, but a mini REIT conglomerate headed by a common management group. The combined market capitalization of the equity in these entities was valued at $529 million on 3/31/97. If you just rolled them up they?d have been valued 58th of our universe of 182 publicly traded real estate companies. As we shall see, however, each sells at a substantial discount to what management estimates to be the value of its underlying real estate assets. The focus of this report is on the Phillips controlled entities, and to simplify following these issuers, we will refer to the combined companies as "Son of Southmark" or "SOS" for short.
Who runs SOS (Son of Southmark)?
Understanding the interrelationship between these companies and the people involved is what makes an interesting story. First they have common officers, addresses and a common advisor. The advisor, and the address, is: Basic Capital Management, Inc. 10670 N Central Expressway Dallas, Texas 75231. The 10k notes:
"Basic Capital Management (BCM) Continental Mortgage & Equity REIT (CMET), National Realty LP (NOLP), and the Gene E. Phillips Trust (GEP Trust) may be deemed to constitute a "person" within the meaning of Section 13 (d) of the Securities Exchange Act of 1934, as amended, because BCM is beneficially owned by a trust established for the benefit of Gene E. Phillips' children and the executive officers of BCM are also executive officers of CMET. Gene E. Phillips is a general partner of Syntek Asset Management, L. P. ("SAMLP"), which is the general partner of NLP."
To understand how direct the control is look at this chart. Remember that in a Limited Partnership, as opposed to a corporation, the Limited Partner Investors have very few rights or controls on the General Partners. When you look through National Realty the control essentially resided with two entities, Gene Phillips, and the Gene E. Phillips Children?s Trust. That?s certainly not even slightly illegal, but as we try to explain what is pushing American Realty?s share price up (and what is holding National Realty?s unit price down) you have to understand that.
To follow that trail, Basic Capital Management ("BCM") is a private company organized in Nevada. Public documents say its "principal business activity is the provision of advisory services for real estate investment trusts." Its principal place of business and principal office is located at 10670 North Central Expressway, Suite 600 Dallas, Texas 75231. BCM is owned by Realty Advisors, Inc., a Nevada corporation. Realty Advisors, Inc. is owned by a trust established for the benefit of the children of Gene E. Phillips. The directors and executive officers of BCM are as follows:
Name, Position(s) with BCM
Randall M. Paulson, President
Oscar W. Cashwell, Executive Vice President
Thomas A. Holland, Executive Vice President and Chief Financial Officer
Clifford C. Towns, Jr., Executive Vice President, Finance
Bruce A. Endendyk, Executive Vice President
Cooper B. Stuart, Executive Vice President
Mark W. Branigan, Executive Vice President
Lynn W. Humphries, Senior Vice President, Commercial Asset Management
Dan S. Allred, Senior Vice President
Robert A. Waldman, Senior Vice President, General Counsel and Secretary
Drew D. Potera, Vice President, Treasurer and Securities Manager
Mickey Ned Phillips, Director
Ryan T. Phillips, Director
Remember those names because most of them reappear as officers of ART, CMET and TCI:
Name, Position(s) with ART, CMET, TCI
Randall M. Paulson, President
Thomas A. Holland, Executive Vice President and Chief Financial Officer
Bruce A. Endendyk, Executive Vice President
Lynn W. Humphries, Senior Vice President, Commercial Asset Management
Robert A. Waldman, Senior Vice President, Secretary and General Counsel
Drew D.. Potera, Treasurer
Ted P. Stokely, Trustee
Edward L. Tixier, Trustee
Martin L. White, Trustee
Edward G. Zampa, Trustee
A search of the 10Ks turned up five major areas not normally as prominent in most REIT SEC filings. Five extraordinary SOS issues stuck out:
1. FEES TO AFFILIATES
2. INSIDER TRADING
3. MARGIN ACCOUNTS
4. LEGAL ISSUES
5. "REVALUATION EQUITY"
To take them in order:
Extraordinary SOS Issue #1: FEES TO AFFILIATES
One of the trademarks of the limited partnership business of the 1980?s was the fee structure -- largely to the benefit of the General Partners. It appears that SOS has been able to transfer those fees into the REIT format. SOS almost seems to be an 80s limited partnership "Lazarus" come back in the form of a REIT. The combined management fees and cost reimbursements for the five companies in 1996 was $28.5 mm, or 5.4% of the combined market cap on 3/31/97. Together, with the dividends received from related companies, the total comes to $32,000,000 to run a group of assets that BCM publicly states is worth about $1.8 billion.
To compare these fees, we looked at the G&A expenses of diversified REITs of comparable size. WASHINGTON REIT (NYSE: WRE) (N) (S) (N) (S), a $568 million diversified REIT, had G&A expenses of $3.095 mm, or 0.55% of market cap -- 1/10th the amount of SOS. To look at it another way, you could hire the management team running an equivalent size REIT (around $2 billion in assets) and pay its G&A of $9 million and still have $15 million a year left for increasing the dividend.
1996
ARB
NLP
CMET
TCI
IOT
Fees $ 5,126 $ 3,510 $ 7,738 $ 4,421 $ 535
Cost reimbursements $ 691 $ 825 $ 1,047 $ 140
Total $ 5,817 $ 3,510 $ 8,563 $ 5,468 $ 675
% of Mkt. Cap 2.72% 3.14% 13.59% 10.95% 3.02%
TOTALS $ 24,033
5.21%
3/31/97
Price 16.75 17.5 15 12.5 14.625
Shares Outstanding 12,765,082 6,387,270 4,199,147 3,994,687 1,530,008
Market Cap $213,815,124 $111,777,225 $62,987,205 $49,933,588 $22,376,367
TOTAL MARKET CAP $460,889,508
Shares Held by Affiliates 8,855,644 3,720,894 2,163,447 1,726,454 839,552
% of Total Shares 69.37% 58.25% 51.52% 43.22% 54.87%
1996 Dividends/share $ 0.15 $ 1.10 $ 0.89 $ 0.28 $ 0.40
Total Dividends $ 1,914,762 $ 7,025,997 $ 3,737,241 $ 1,118,512 $ 612,003
Affiliates Dividends $ 1,328,347 $ 4,092,983 $ 1,925,468 $ 483,407 $ 335,821
Dividends to Public Shareholders $ 586,416 $ 2,933,014 $ 1,811,773 $ 635,105 $ 276,182
Fees to Affiliates $ 24,033,000
Dividends to Affiliates $ 8,166,026
Total Cash Flow to Affiliates $ 32,199,026
Cash Flow to Public $ 6,242,490
However you slice it, the math is simple. Insiders at SOS cashed checks of $32,199,026 last year. The dear public shareholders got a whopping $6,242,490. Hardly seems worth paying for the stamps to mail those teeny dividends out, does it? SOS?s fees last year amounted to a very high (for REITs) 3.1% of market cap. Had they been 1% (almost double Washington REIT's) the SOS dividend would have been 7.3% and there might be a bit more lively public market for all these shares.
Extraordinary SOS Issue #2: INSIDER TRADING
As we have frequently mentioned on the Motley Fool Real Estate board, one of the desirable characteristics of a REIT is common interest of management and shareholders, as demonstrated by the ownership position of management. The higher the ownership position of management the better, or at least that?s what we usually think. In the instance of the SOS group, there can be no question of their position. Not only is their ownership position established, it grows on a monthly basis. Are management and minority shareholder interests in sync this time? Frankly we doubt it.
In the past, I have both executed the sale of "control" or "144" stock for officers of NYSE listed companies, and purchased stock for a Fortune 500 company in its "pre-filing" open market purchases of an acquisition target. Both situations require care in trade execution from both the account and the broker, since the trades are carefully scrutinized by the regulators. Both are subject to disciplinary action for "screw-ups".
My greatest involvement with the limitations of "insider trading issues" came shortly after the 1987 market crash. Numerous companies were announcing major stock repurchase programs both as a signal to the market that management felt their company prices were undervalued, and as a good use of company funds as stock prices traded below book value.
To garner some of this business, I proposed a new strategy -- the sale of "naked puts" for companies with listed options. The selling of put options offered these companies a unique opportunity to create value while fulfilling their repurchase commitments. Simply stated, as a seller of its put options, the company would undertake an obligation, for a certain period of time, to purchase shares of its stock at a set price known as the "strike? price. In return for undertaking this obligation, the company receives a premium, in the form of cash, from the purchaser of the put. If the stock is below the strike price at expiration, the premium reduces the cost of the stock bought. If the stock is above the strike price, the option expires worthless, and the company keeps a tax advantaged cash flow.
Market volatility was so high at the time that the premium levels were at record levels, making the strategy even more appealing. Recently, the Wall Street Journal outlined how many companies today are generating billions of dollars using this strategy.
At the time, however, this untested approach needed SEC approval via a "no-action" letter from them indicating that the companies using this approach were not in violation of the Securities Exchange Act of 1934. Specifically the concern was with "Rule 10b-18".
"Rule 10b-18 under the Exchange Act(the "safe harbor" rule for open market repurchases by issuers) defines some of the activities that an issuer must not be entered into for the purpose of, or, to the extent possible, in a manner that results in, supporting or raising the prices of their stocks. In purchasing stock, an issuer should refrain from bidding for or buying such stock at prices above those established independently by others, buying on successive "upticks", dominating trading volume, trading at or near the close, and the like."
Neither I nor my associates are lawyers, but the section is quite specific, and it makes me wonder if the SOS purchases of their related entities stocks have not violated the spirit, if not the letter of the law. It is not very likely that they have been trying to drive the price up, but as we will see they for sure appear to have been dominating trading volume.
With these considerations in mind, we looked at a breakdown of the volume of the stock purchased for any given period of time to see what percent of the total volume the "SOS" buys represented. In 1987, I recall the limit on daily purchases was 25% of the last 30 days average volume. We?d leave it to others to judge that now, but here is a sampling of American Realty?s Purchases of National Realty:
Fourth Quarter, 1996 purchases of National Realty LP by (ART) a subsidiary of American Realty (ARB)
NLP Purchases Reporting Person Date Number of Units Price Per Unit Total Daily Volume % of Total Volume
ART 10/30/96 200 $12.25 300 66.67%
ART 10/31/96 200 $12.25 300 66.67%
ART 11/12/96 100 $12.25 400 25.00%
ART 11/13/96 200 $12.25 200 100.00%
ART 11/15/96 100 $12.25 500 20.00%
ART 11/19/96 800 $12.25 900 88.89%
ART 11/20/96 100 $12.25 100 100.00%
ART 11/21/96 100 $12.25 2100 4.76%
ART 11/26/96 400 $12.25 2300 17.39%
ART 11/27/96 2,200 $12.25 3500 62.86%
ART 11/29/96 100 $12.25 100 100.00%
ART 12/10/96 700 $12.63 900 77.78%
ART 12/11/96 1,700 $12.63 3200 53.13%
ART 12/23/96 200 $12.75 400 50.00%
ART 12/24/96 2,100 $12.75 2100 100.00%
ART 12/26/96 6,700 $12.75 9500 70.53%
ART 12/27/96 300 $12.88
ART 12/27/96 600 $13.00 900 100.00%
ART 1/3/97 500 $13.00 1400 35.71%
ART 1/6/97 600 $13.00 2300 26.09%
ART 1/10/97 1,000 $13.00 2400 41.67%
Totals 18900 33800 55.92%
Of even greater interest are the purchases of American Realty (ARB) by Basic Capital Management (BCM) in the first quarter of 1997 (graphic). Here the volume of stock American Realty bought was twice the reported volume of the shares traded, and the prices paid have no relationship to the high, low, or close of the stock on the day cited in the "13D." As these are stated on the 13Ds to be "open market" transactions, there is a requirement that the trades must be "printed" on an exchange. So why the wide differential? We do not know.
The persistence and increasing volume of this insider trading by SOS is illustrated in these charts. Please note that these charts, courtesy of Telescan, show the net number of insider purchases less sales, smoothed over twelve months - not the total shares bought.
The pattern seems to be that first insiders started to pick up shares in American Realty around 1991, about the time the Moorman settlement was agreed to. By the mid 90s, purchases of Transcontinental Realty (TCI), Income Opportunity Trust (IOTS) and Continental Mtg. (CMETS) were rapidly increasing and by 1995 insiders began to significantly increase their rate of buying NLP shares.
We wanted to look more closely at a period before the big run-up in American Realty?s share prices began. We picked the period from 10/31/96 to 1/10/97. Investor Insight reports that a total of 61,200 shares of American Realty traded in those 71 days. During that same period SOS entities? SEC filings indicate they bought 18,900 of them. That represents a commanding 31% of all the shares traded.
Extraordinary SOS Issue #3: MARGIN BORROWING ON A REIT BALANCE SHEET?
Most real estate structures typically include a fair amount of leverage, and it comes in many forms; mortgages at the property level, sub-debt at the REIT level, secured, unsecured, lines of credit, etc. Never before, however, have we seen "margin accounts" on the balance sheet of any REIT we?ve looked at. It is, however, found throughout the filings of all the "SOS" entities. If nothing else, SOS is creative in its financing techniques. To quote American Realty?s 10K:
"Loans Payable. The Company has margin arrangements with various brokerage firms provide for borrowings up to 50% of the market value of marketable equity. The borrowings under such margin arrangements are secured by such securities and bear interest rates ranging from 7.0% to 11.0%. Margin were $40.0 million (approximately 34.5% of market value) at December 31 1996, compared to $34.0 million at December 31,1995. August 1996, the Company consolidated its existing National Realty, L.P.("NRLP") margin debt held by the various brokerage firms into a single loan of $20.3 million. The loan is secured by the Company's NRLP units with a market of at least 50% of the principal balance of the loan. As of December 31,1996, 3,418,319 NRLP units with a market value of $44.9 million were pledged as for such loan in August 1996, the Company obtained a $2.0 million loan from a financial secured by a pledge of equity securities of Continental Mortgage Equity Trust ("CMET"), Income Opportunity Realty Investors, Inc. ("IORI") Transcontinental Realty Investors, Inc. ("TCI") (collectively the "REITs" )by the Company and Common Stock of the Company owned by Basic Capital, Inc. ("BCM"), the Company's Advisor with a market value of $4.0. The Company received $2.0 million in net cash after the payment of costs associated with the loan. September 1996, the same lender made a second $2.0 million loan. The second is also secured by a pledge of equity securities of the owned by the Company and Common Stock of the Company owned by BCM with a value of $5.0 million. The Company received $2.0 million in net cash the he payment of closing costs associated with the loan."
As an institutional broker, my personal experience with margin practices and requirements has been somewhat limited. Margin accounts are typically the realm of the individual retail account. They are regulated by the U.S. Treasury and in essence are short-term loans extended by brokerage firms to enable their clients to put up only a portion (currently a maximum of 50%) of the value of stocks purchased. The margin agreement has detailed contractual elements. Stocks in these accounts are held in "street name" meaning that they are registered in the name of the brokerage firm that has ultimate control of the stock
I have on occasion arranged for a major client to use control stock as security for a margin loan. The results were an interest rate 300 basis points lower than what Chase Manhattan would lend the same client on a major business loan. While this was 20 years ago, and I don?t recall all of the restrictions on the use of "control stock" as collateral, it was considerable. This is because if the stock were to drop in value, the brokerage firm would be limited in selling the stock without a registration statement.
Because these loans are highly liquid, with control of the security in the hands of the lender, the rate is very low, typically 100 basis points below prime. The rate is negotiable, and typically inversely related to the amount borrowed. One Boston based discount broker advertises margin rates as low as 1% below broker call. Today that would be 6.25% vs. Prime @ 8.5%.
The first question that comes to mind is, why would they pay 400 basis points higher for some of their borrowings then they do for others (11% vs. 7%), The next question is, what is the purpose of holding margin accounts with 60, (yes, count them - 60) different brokerage firms? Conspicuously absent from this list is the largest brokerage firm of all, "Mother Merrill". This omission is especially interesting when you note that the background of the "Securities Manager" includes a stint at Merrill.
DREW D. POTERA: Age 37, Vice President (since December 1996), Treasurer (since August 1991) and Assistant Treasurer (December 1990 to August 1991). Vice President (since December 1996) and Treasurer (since December 1990) of CMET, IORI and TCI; Treasurer (December 1990 to February 1994) of NIRT and VPT; Vice President, Treasurer and Securities Manager (since July 1990) of BCM; Vice President and Treasurer (since February 1992) of SAMI; and Financial Consultant with Merrill Lynch, Pierce, Fenner & Smith, Incorporated (June 1985 to June 1990).
Given his evident qualifications, some questions come to mind for Mr. Potera, such as "Having lived through October 1987 as a broker, do you remember the days, when your accounts could not reach you because Merrill?s phones were constantly busy?
For answers to some of our questions, I turned to an old friend, Phil McMorrow, who is currently the Chief Compliance Officer of a regional NYSE member firm. Though a former regulator with the National Association of Securities Dealers (NASD), Phil said this was new to him, too, and it would raise a number of red flags if these accounts were under his supervision. First, all of the margined stock would be considered "control" stock and have limited collateral value in a margin account by itself. He was also at a loss to explain how the companies could account for "Open Market" purchases of this control stock at prices other than were printed on the tape.
Again more questions with few satisfactory answers.
The next table lists all the brokerage firms margining these securities in the latest filings with the SEC and their risk exposure to a sudden drop in the prices of these five inter-related stocks. We have no way to know whether any of them has considered the effects of the effective cross collateralization of their holdings. "Sixty, Count ?em, Sixty"
Broker/Dealers Total Exposure on Margin Accounts to all SOS Entities
Advest, Inc. 99,225 Legg Mason (TX) 42,500
The Advisors Group 26,400 Marsh Block 19,050
Alex Brown (NY) 485,450 May Financial 90,700
Allied 22,050 McDonald & Co 92,600
American Express Fin. 40,900 Montgomery 37,900
Arnold Sec. 43,400 Morgan Keegan 70,356
Baker & Co 33,982 Mutual Sec. 289,975
Baraban Securities 17,000 NationsBanc Cap 158,109
Boatmen's 45,850 Nationwide Sec. 63,450
Brown & Co 365,436 Neuberger 16,500
Bear Stearns 129,550 Olde 95,350
Bidwell & Co 29,500 Oppenheimer (NY) 203,192
Chase Securities 27,200 Oppenheimer (TX) 66,837
Chatfield Dean 55,075 Pacific Brokerage 69,400
CJ Lawrence 61,500 The Principal Group 145,684
CS First Boston. 3,639,810 Prudential (TX) 120,400
Cowen & Co. 38,750 Raymond James 191,200
Dain Bosworth 302,487 Rauscher Pierce Refsnes 186,000
Dean Witter (NY) 681,125 Regions Inv. 9,500
Dean Witter (CA) 48,500 Rodman & Renshaw 49,150
Equitable 45,700 Roney & Co 52,374
First Southwest 123,700 Securities of America 41,750
Global Strategies 118,548 Signet 10,250
Goldman Sachs 99,480 Southwest Securities 8,200
Hambrecht & Quist 54,550 Tucker Anthony 381,791
HD Vest 10,500 United Pacific Bank 49,350
Interfirst Capital Corp 19,000 UBS Securities 26,500
JB Oxford 25,500 Wachovia 28,700
Jefferies (TX) 32,500 Washington Discount 175,218
JW Charles 48,000 Wedbush Morgan 42,250
Source: Company Filings with the SEC TOTALS
9,604,904
(We have a spreadsheet available that provides greater detail for any broker/dealers that may have an interest in the inte |
